What is a Bond?

TECHNICALLY SPEAKING, a bond is a loan and you are the lender. Who's the borrower? Usually, it's either the
U.S. government, a state, a local municipality or a big company like General Motors. All of these entities need
money to operate -- to fund the federal deficit, for instance, or to build roads and finance factories -- so they borrow
capital from the public by issuing bonds.

Now for a little bond-speak. When a bond is issued, the price you pay is known as its "face value." Once you buy
it, the issuer promises to pay you back on a particular day -- the "maturity date" -- at a predetermined rate of
interest -- the "coupon." Say, for instance, you buy a bond with a $1,000 face value, a 5% coupon and a 10-year
maturity. You would collect interest payments
totaling $50 in each of those 10
years. When the decade was up, you'd get back your $1,000 and walk away.

A key difference between stocks and bonds is that stocks make no promises about dividends or returns. General
Electric's dividend may be as regular as a heartbeat, but the company is under no obligation to pay it. And while
GE stock spends most of its time moving upward, it has been known to spend months -- even years -- going the
other way.

When GE issues a bond, however, the company guarantees to pay back your principal (the face value) plus
interest. If you buy the bond and hold it to maturity, you know exactly how much you're going to get back (in most
cases, anyway). That's why bonds are also known as "fixed-income"
investments -- they assure you a steady payout or yearly income. And although they can carry plenty of risk (we'll
discuss why in our How Bonds Behave lecture), this regular income is what makes them inherently less volatile
than stocks.

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